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7 investing mistakes to avoid when buying ETFs

7 investing mistakes to avoid when buying ETFs

In the picture-perfect world, it is all about making magnificent profits. Charles D. Ellis, the investing luminary, compared investing to amateur tennis, as victory goes only to the player making the fewest mistakes. Victory is rarely in the hands of a player who tries to smash every point only to keep whacking the ball out of the court and into the net. Likewise, there are some ETF investing mistakes investors should avoid.

1. ETF Investment Strategy
Not understanding the ETF investment strategy or its composition is one of the top ETF investing mistakes. Ideally, one must understand what’s underlying with the ETF. It can help one know if it caters to one’s objectives. On the contrary, knowing and understanding where one puts money is decisive. So, take time to analyze to what extent the return of the ETF matches the index it replicates and how regular the monitoring is.

2. Trying to overshadow the market
We all wish to overturn the market. But sadly, nobody can do it consistently. Moreover, when one tries to outperform the market, it will only condemn one to substandard results. The active investors chop their returns by adding to the excessive fees. Thus, one must employ funds that track indexes, like ETFs.
The SPIVA study demonstrates that even active fund professionals who get money to beat the market perennially fail to do so. Of course, people will beat the market every year. However, most people cannot do it for more than five or ten years. Hence, one must never use past performance as a metric for future success. By doing so, one merely mistakes luck for skill.

3. Not monitoring the portfolio and its evolution
Many investors do not monitor their portfolios. Believing everything will be fine is one of the worst ETF investing mistakes. Many ETFs are susceptible to underperforming or disappearing. Thus, portfolio monitoring is vital to avoiding disappointments and incorporating timely adjustments.

4. Ignoring the associated commissions and expenses
When investors buy and sell too frequently, they incur higher-than-expected expenses, trimming their profit margin. Readjusting their portfolio implies enduring purchase commissions for new ETFs, sales commissions, and taxing capital gains. These added expenses reduce their possible returns.

5. Not being properly diversified
Diversification means not putting all one’s eggs in one basket. While most people do that, they fail to diversify qualitatively against the different investing risks. One may have thousands of shares in the Nasdaq ETF, S&P 500, and MSCI World, but all these ETFs will fall together in a bear market. They are hugely correlated as:

  • US firms dominate their indexes.
  • They are all invested in equities.

So, merely diversifying is not enough. The idea is to diversify such that it addresses the diverse economic conditions that can sweep the world:

  • Stagflationary scenarios or high inflation – Inflation-linked bond ETFs
  • Currency debasement or systematic collapse – Gold ETCs
  • Growth – Global equity ETFs
  • Deflationary recessions – Investment grade government bond ETFs

To understand these four points of diversification covered, one must explore the sub-asset classes to maximize one’s portfolio. For instance:

  • Varied average maturities for bonds
  • Risk strategies and Investigating regions for equities

One is probably not diversified if nothing in the portfolio makes them sad. In the history of the market, there has been no investment that works every time. However, avoid projecting the current circumstances into the distant future. Is everyone not under the impression that inflation was no longer a concern? It seems that no system can remain unchanged indefinitely. Eventually, bond funds will increase in value once more, while tech firms will face the consequences of their actions.

6. Chasing the hot trends
Another ETF investing mistake is investing in in-fashion divisions or following the publicized build-up without proper research or a long-term analogy. Steer clear of the lucrativeness of the short-term pattern. Instead, focus on a well-defined theory that aligns with one’s profitability goals.

7. Buying high, selling low
It is a well-known fact that to make money, one must purchase at a low price and sell at a high price. Despite this, why does everyone pursue investments whose values have already surged? Similarly, why do we dispose of an ETF that has undergone a losing streak? It is widely recognized that when the value of a good ETF drops, it is a great deal. However, as humans, we are wired to follow the crowd. Therefore, if everyone is investing in cryptocurrency, we tend to experience a fear of missing out and feel compelled to do the same.

It is common to feel foolish for not joining the trend of investing when everyone else is making money. Similarly, the toughest time to invest in the stock market is during a significant downturn when prices hit rock bottom. Although it’s natural to worry about the recovery of individual stocks, investing in ETFs that follow the broader markets is likely to rebound. Therefore, during difficult times, it’s advisable to stay invested rather than selling at a loss. Purchasing stocks at low valuations can result in significant profits when prices rise again. To take advantage of market lows, consider investment techniques like cost averaging and rebalancing, which can help one purchase at low prices and sell at high prices to increase earnings.

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